How does the role of Medicare/Medicaid affect the drugs sector in the U.S.? (UNH, HUM)

Medicare and Medicaid have enormous influence on the pharmaceutical, or drugs, sector in the United States. For instance, nearly 70% of all Medicare beneficiaries have prescription drug coverage, which displaces or manipulates private sector prices and resources. As prescription drugs remain the predominant therapeutic approach to most diseases, drug companies increasingly focus on the Medicare and Medicaid beneficiaries as a major consumer group. Increasing drug benefits and coverage through entitlement programs is likely to increase market prices and increasingly harm those without coverage.

Medicare Prescription Drug Plans and Concentrated Corporate Benefits

After the Medicare Modernization Act of 2003 and the introduction of prescription drug coverage through Part D, which did not actually go into effect until three years later, the nearly 60 million Americans on Medicare gained access to new federal-approved drug plans. The primary drug benefit comes from the standard, standalone prescription drug plan, or PDP, and the Advantage Plan, or MA-PD. These combine to cover all drug-related Medicare benefits.

Five firms receive the bulk of the financial benefits from these programs: UnitedHealth (UNH), Humana (HUM), CVS/caremark (CVS), Aetna (AET) and Express Scripts (ESRX). Greater than two-thirds of all Medicare enrollees, and their accompanying subsidized drug expenditures, go to these corporations. Since government-sponsored drug coverage artificially inflates the purchasing power of prescription drug consumers, these five firms are able to capture a higher level of incoming revenues.

Overpayments to Drug Companies and Reducing Competition

The years after 2006 revealed an unintended and troubling trend in the pharmaceutical industry: skyrocketing costs for drugs and ever-growing pocketbooks for connected producers. A small amount of this was the predictable result of a switch from Medicaid recipients, who get drugs at far lower prices than Medicare, to Part D.

Most specifically, Congress limited the ability of Medicare to negotiate drug prices in the same way as Medicaid or the VA. When drug makers are forced to compete with one another for subsidized clients, prices tend to drop. U.S. Congress removed competition by banning Medicare from negotiating on behalf of its beneficiaries.

Medicare Reimbursements and Drugs Sector Profitability

There is no question that some companies, such as hospitals, physician groups, drug manufacturers and marketing companies, have been created or thrived because of the introduction of Medicaid and Medicare in 1965.

However, industry lobbyists have been successful in blocking cost controls and inhibiting competition. Combine these efforts with the enormous hurdles thrown up by the Food and Drug Administration (FDA), and what is left is a system where taxpayers write a limitless check to providers and insurers.

In 2012, the Centers for Medicare and Medicaid Services revealed that some 4,000 doctors and other medical professionals received more than $1 million each in one year alone. Most of this income comes from specific Medicare reimbursements for individual drugs. Obviously, there is an incentive for doctors to prescribe certain medicines to reap the benefits of these billings.

Unlike a private system, where doctors try to limit the expense of the drugs provided, the Medicaid and Medicare programs incentivize doctors to push up the prices for specific drugs and, in the process, price out many consumers who do not qualify for coverage.